Thursday, January 13, 2011

In a letter to CFTC Chair Gary Gensler, Senators Bill Nelson (D-FL) and Maria Cantwell (D-Wash) urged the CFTC to use the power bestowed on it by the Dodd-Frank Act to quickly and aggressively impose position limits on the amount of speculative investment in oil, wheat and other commodities and to reject industry entreaties to delay or weaken the regulations. The growing role of hedge funds, financial traders, and long-term passive investors in energy and other commodity markets has contributed to rising volatility in the cost of gasoline and food. Thus, the senators emphasized that it is critical that the CFTC fully execute these changes called for in Dodd-Frank. The letter was also signed by Senators Bernie Sanders (I-VT) Patty Murray (D-WA), Carl Levin (D-MI), Sheldon Whitehouse (D-RI), Robert Menendez (D-NJ) and Ron Wyden (D-OR).

Section 737 of Dodd-Frank directs the CFTC to establish limits on the amount of positions, other than bona fide hedge positions, that may be held by any person and to set limits to diminish, eliminate, or prevent excessive speculation. In addition to position limits on specific persons, the Dodd-Frank Act also directed the Commission to establish limits on the aggregate number or amount of positions in contracts based upon the same underlying commodity that may be held by any group or class of traders.

In order to combat excessive speculation in oil and other commodities, Congress directed the Commission to enact new and meaningful restrictions on the size of investors’ commodity holdings. By directing the Commission to establish aggregate limits on the positions held by any group or class of traders, noted the letter, Congress intended for the Commission to act aggressively to prevent the harmful and damaging effects of excessive, broad-based speculation in commodity markets.

The senators cautioned the CFTC to resist industry pressures to use the rulemaking process to eviscerate the new position limits and to reject requests to exempt broad categories of derivatives or broaden the definition of bona fide hedging to include investment-related hedging. Moreover, firms and investors should not be able to circumvent the limits by disaggregating the investments they make through different funds. The senators described these industry requests as little more than an effort to open a back door to the commodity markets for Wall Street insiders.

In recent years, Senators Nelson and Cantwell have offered several measures intended to prevent manipulation and reduce excessive speculation in commodity markets. Senator Nelson previously filed legislation to close the so-called “Enron loophole,” which allowed energy derivative trading firms such as Enron to operate without transparency or regulatory oversight. And Senator Cantwell proposed a bill to enable regulators to prevent and combat manipulation in commodity markets. Some of the changes advocated by the senators were included in the Dodd-Frank Act.

The Enron loophole was inserted at the last minute into the Commodity Futures Modernization Act of 2000 and passed in the waning hours of the 106th Congress. This loophole, which exempted from federal oversight the electronic trading of energy commodities by large traders, helped foster the explosive growth of trading on unregulated electronic energy exchanges.

A measure reauthorizing the CFTC and closing the Enron loophole was included in the massive Farm Bill. Provisions in the Food, Conservation and Energy Act of 2008, which ended the Enron-inspired exemption from federal oversight provided to electronic energy trading markets set up for large traders.